EUR/USD Dec 5 – Steady as Markets Hopeful over Greek

EUR/USD is steady, and the pair continues to test the 1.31 line. The euro has put on an impressive rally, rising about 150 points against the dollar in the past week. Market sentiment remains cautiously positive over the Greek debt agreement. Following approval from the German parliament for the Greece debt agreement, Greece has now launched a buy-back scheme from private investors, as part of the deal. In economic news, Italian Services PMI fell below the estimate, but Spanish Services PMI rose. There was more good news out of Spain, as Spanish 10-year bonds posted a slightly lower yield this month. However, Euro-zone Retail Sales were a big disappointment, posting its largest drop in 2.5 years. In the US, there are two key releases – ADP Non-Farm Employment Change and ISM Non-Manufacturing PMI.

EUR/USD Technical

Asian session: Euro/dollar was steady, as the pair consolidated at 1.3110. The pair has edged lower in the European session, dropping below 1.31.

Greece launches buy-back program: Greece has offered to purchase 10 billion euros of its national debt, as part of the new bailout agreement aimed at resolving the country’s severe debt crisis. Market sentiment was positive after the Greek government offered a premium on markets prices for Greek bonds. The EUR 10 billion buy-back could allow Greece to retire up to EUR 30 billion worth of debt. Greece is expecting the next installment of aid on December 13, and the buy-back is scheduled to be completed by December 17. In a sign that public declarations are not engraved on stone, German Chancellor Angela Merkel hinted that Berlin could consider a write-off of its Greek loans. Germany has strenuously objected to such a haircut, but may have to show more flexibility if Greece is to stand on its financial feet.

Spanish 10-year bond auction a success: The Spanish treasury raised 4.251 billion euros in today’s bond auction. The average yield on 10-year bonds fell to 5.29%, down from 5.52% in November. With these positive numbers, the government may feel it can do without an aid package. Just last week Spain tapped into a bailout for its banks, as it requested the ESM to transfer about 40 billion euros money to Spain’s banking authority FROB. These funds will be add to Spain’s national debt. The country posted some positive economic data this week, including a strong drop in unemployment claims. However, Spain is grappling with an economic recession, and may have to resort to a rescue package sometime in 2013.

German parliament gives nod to Greek deal: The agreement on Greece’s debt passed a major hurdle as German lawmakers overwhelmingly approved the deal, by a vote of 473-100. The agreement includes a debt buy-back scheme and an interest rate cut on loans to Greece. The approval by the German parliament clears the way for Athens to finally receive the 44 billion euro bailout package agreed to by the troika.

Euro keeps rolling higher: Despite often sluggish economic data out of the euro-zone, the euro has enjoyed recent success against the US dollar. EUR/USD has jumped around four cents since mid-November, as the euro tests the 1.31 line. If the Greek debt agreement proceeds according to plan, look for the euro to benefit. As well, EUR/USD could make further inroads if the US fiscal crisis is averted, as the appetite for non-US assets would increase.

Cyprus may request bailout: With the Greece debt deal moving along and Spain looking to tap into its rescue fund, the next candidate for a bailout could be Cyprus. Euro-zone finance ministers are considering a proposal whereby the island zone member would receive 10 billion euros in aid to refinance its banks, which have been badly hurt by the euro-zone debt crisis. No final agreement will be made prior to an audit of Cypriot banks,which should be completed in the next few weeks.

Fiscal cliff battle continues: Republicans and Democrats continue to attack each other over the looming fiscal cliff crisis. The Democrats have demanded $1.6 trillion in additional taxes over the next 10 years, with higher taxes on those earning over $250,000. The Republicans have offered $800 billion in new tax revenue from spending cuts and overhauling the tax code. However, the Republicans are split on whether to agree to higher income tax rates, and the Democrats, led by President Obama, could take advantage of the disarray in the Republican camp. The markets are hoping that the politicians will find a compromise and avoid a crisis which could threaten the fragile US recovery. Both parties are likely to continue talking tough for a while yet, as the fiscal cliff clock ticks louder every day.

About Author

Kenny Fisher - Senior Writer
A native of Toronto, Canada, Kenneth worked for seven years in the marketing and trading departments at Bendix, a foreign exchange company in Toronto. Kenneth is also a lawyer, and has extensive experience as an editor and writer.
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